Joint bookrunners JPMorgan and Morgan Stanley are expected to launch a 10 non-call five issue for Wing Hang Bank at the beginning of next week. Pricing of the lower tier 2 issue is provisionally scheduled for either Wednesday or Thursday following roadshows in Singapore, Hong Kong and possibly London.
The deal will part finance the bank's HK$4.8 billion ($615 million) acquisition of Chekiang First Bank from Mizuho Corporate Bank. This is being completed through a combination of subordinated debt (HK$2 billion), cash ($1.65 billion) and a special dividend (HK$1.15 billion).
Pre-transaction, Wing Hang had an overall CAR of 16.5% of which tier 1 equity comprised 15.4%, while Chekiang had an extremely high CAR of 26.6% of which tier 1 comprised 26.7%. Post merger and post transaction, Wing Hang should still be fairly conservatively capitalised with an overall CAR of about 14.9%, of which tier 1 will comprise about 10.1%.
The reduction in tier 1 capital relative to the overall capital ratio will, however, give the bank a better capital mix and improve its ROE (Return on Equity). As of December this stood at 11% and analysts estimate it will rise to 11.9% by the end of 2003.
In terms of pricing the new deal, the leads have three main benchmarks. The closest in terms of maturity is a January 2007 issue for Dao Heng Bank, recently renamed DBS Bank. However, given that this deal was issued six years ago in Yankee format, it is now highly illiquid.
It also benefits from the halo effect of its parent DBS, which means it is trading tight relative to the Hong Kong sub debt universe. During Asian trading hours yesterday (Wednesday), the 7.75% issue was being quoted at 112.41% to yield 3.82%. This equates to 33bp over five-year Treasuries, or 68bp over Libor.
As a result, the best comparable is probably Bank of East Asia (BoEA), which has the same Baa2 sub debt rating as Wing Hang Bank from Moody's. The two banks are also relatively similar in size, with BoEA ranking as the third largest, listed Hong Kong based bank by assets and Wing Hang Bank fourth. Ahead of them are Hang Seng Bank and Bank of China, while HSBC and Standard Chartered are global banks and DBS is not listed.
BoEA has a 7.5% February 2006 deal outstanding, which is trading at 109.08% to yield 3.54%. This equates to 163bp over two-year Treasuries, or 102bp over Libor.
Because of its smaller asset size, Wing Hang is expected to come at a premium to BoEA, but inside the third comparable Dah Sing Bank. A smaller asset size is also one of the main reasons why Dah Sing trades about 35bp wider than BoEA on a Libor basis.
Yesterday, its 7.5% March 2006 transaction was being quoted at 108.42% to yield 3.94%. This equates to 203bp over Treasuries or 137bp over Libor.
Market observers believe the deal should proceed relatively smoothly. Firstly, it benefits from a pole position in the autumn pipeline. Secondly, as a Hong Kong credit it should gain an advantage from its rarity value relative to the Korean sub debt deals, which struggled after swamping the market just before the summer break. And thirdly, unlike the Korean banks, Wing Hang should see good demand from Hong Kong based private banking money searching for yield.
In a ratings assessment published yesterday, Moody's commented that the planned acquisition of Chekiang First Bank, "will result in a larger and more resilient franchise for WHB, allowing it to better compete in the consolidating market place in Hong Kong."
Wing Hang, which is purchasing Chekiang at an attractive 1.22 times book value, has also said that it is interested in further M&A opportunities, whether as a consolidator or consolidatee. Pre-acquisition, the bank ranked eleventh by assets among Hong Kong banks and has two major shareholders: the Fung family (20%) and Bank of New York (25%).